By Andrew Sherlock
Australia is on the brink of the nation’s biggest ever intergenerational wealth transfer. Yet estate or inheritance planning is rarely discussed by families. With baby boomers shifting into retirement, it’s important to start the conversation now about your legacy and the people it may impact.
Talking openly about how you want your assets to be passed on can help avoid family disputes that take a toll both financially and emotionally. It provides a certain peace of mind for you – that your intentions will be met – and for your family and friends.
Certainly, the stakes have never been higher, with growing house prices and healthy superannuation balances contributing to a considerable increase in the wealth of many older Australians in the past two decades.
Around $1.5 trillion was transferred in gifts or inheritances between 2002 and 2018. In 2018 alone, some $107 billion dollars was inherited while $14 billion was handed out in gifts.i
The importance of planning
With so much at stake, having an estate plan in place helps to protect the interests of those you care about and to fulfil your wishes. It takes careful thought and professional advice, but that is no excuse for putting the task aside for later. If something happens to you in the meantime, your assets may not be distributed as you would like and there could be tax implications for your beneficiaries.
An estate plan includes a Will and, in some cases, funeral arrangements and instructions for the care of children and animals. Without a Will, your assets will be distributed according to state inheritance laws which may not be what you intended.
A plan may also include instructions for a testamentary trust to hold assets that are then distributed in a tax-effective way to your beneficiaries. And don’t forget your ‘digital will’, a list of any online accounts and passwords that may be important.
Meanwhile, to protect your interests in case you are incapacitated in some way, an enduring power of attorney and a medical power of attorney nominate the people you would like to handle your affairs until you are better.
Estate planning is even more important in the case of blended families or for those with complex family relationships, especially where the emotional issue of the family home is concerned.
Disputes often centre around who gets the house when there are children from a previous marriage, but your new spouse is living in the family home. You could allocate other assets to the children and leave the home to your spouse or require that the house be sold and the proceeds distributed to all. Alternatively, your Will could grant lifetime tenure in the home for your spouse with it passing to your children after your spouse dies. Having conversations early about your intentions can help alleviate possible conflict.
If you are concerned about protecting the interests of a family member with mental health or addiction issues, a testamentary trust can help to look after your assets and distribute funds in a controlled way. A testamentary trust is also often used to provide for young children, holding the assets until they reach adulthood.
Dividing it up
When it comes to deciding how best to allocate assets among children, some prefer to hand out equal shares no matter their individual financial circumstances, while others prefer to give extra to one who may be struggling. Given that Wills are frequently challenged by family members or others who believe they are owed a share or an even bigger share, it’s wise to make your intentions clear in your Will, including reasons and documentation.
While people who receive inheritances are usually well into middle age – on average 50-years-oldii – and perhaps comfortably well-off, you could choose to bypass the next generation. Instead, you might consider leaving your estate to your grandchildren to help set them up with a deposit for a home or cover school fees.
Another option is to begin distributing your estate while you are alive and can share the enjoyment of the benefits the extra financial help might bring.
What’s not covered?
It is important to note that some assets are not covered by your Will. These include assets jointly held with someone else (such as a bank account or a house), super benefits and life insurance.
In the case of jointly held assets, ownership generally passes to the surviving partner and life insurance is paid to the beneficiary named in the policy. For super, completing a binding death benefit nomination is vital to ensure the funds are paid to the person you choose.
With so much to consider, expert advice is critical when preparing an estate plan; the Sherlock Wealth team are here to begin the discussion.
Andrew Sherlock is the Owner & Head of Advice at Sherlock Wealth.
A Sydney-based financial planning firm, Sherlock Wealth has been helping successful families, business owners and individuals with their wealth creation and wealth protection needs for more than two generations.
A Chartered Accountant with a background in funds management, Andrew’s career spans more than 30 years. Andrew was one of the first people in Australia to obtain the Self-Managed Superannuation Specialist accreditation and is one of only a few advisers in Australia to be a Certified Investment Management Analyst. He is a lifetime member of the international MDRT Top of the Table and holds a BA Economics degree from Macquarie University with majors in accounting and finance.
Helping clients achieve their lifestyle goals through smart investing and asset management, wealth structures, and strategic planning are the cornerstones of what Andrew and the team at Sherlock Wealth provide.
Andrew can also be contacted at firstname.lastname@example.org.
ii Wealth Transfers and their Economic Effects – Commission Research Paper – Productivity Commission (pc.gov.au)